Wealth Fluctuations and Risk Preferences: Evidence from U.S. Investor Portfolios

82 Pages Posted: 18 Aug 2020

See all articles by Maarten Meeuwis

Maarten Meeuwis

Washington University in St. Louis - John M. Olin Business School

Date Written: July 15, 2020

Abstract

Using data on the portfolio holdings and income of millions of U.S. retirement investors, I find that positive and persistent shocks to income lead to a significant increase in the equity share of investor portfolios, while increases in financial wealth due to realized returns lead to a small decline in the equity share. In a standard homothetic life-cycle model with human capital and constant risk aversion, the portfolio responses to these two wealth shocks should be of equal magnitude and opposite sign. The positive net effect in the data is evidence for risk aversion that decreases in total wealth. I estimate a structural life-cycle consumption and portfolio choice model that accounts for inertia in portfolio rebalancing and matches the reduced-form estimates with a significant degree of non-homotheticity in risk preferences, such that a 10% permanent income growth leads to an average decrease in risk aversion by 1.7%. Decreasing relative risk aversion preferences concentrate equity in the hands of the wealthy and double the share of wealth at the top of the wealth distribution.

Keywords: Household Finance, Portfolio Choice, Risk Preferences, Life-Cycle Model

JEL Classification: G11, D14, D31, E21

Suggested Citation

Meeuwis, Maarten, Wealth Fluctuations and Risk Preferences: Evidence from U.S. Investor Portfolios (July 15, 2020). Available at SSRN: https://ssrn.com/abstract=3653324 or http://dx.doi.org/10.2139/ssrn.3653324

Maarten Meeuwis (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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